The companies aim to develop high-definition DVD players that would use software from Microsoft and hardware from Toshiba, the companies said.
The agreement offers a potential leg up to Toshiba in its battle against a group led by Sony to define the format for the next generation of DVD players. Sony is championing the Blu-ray technology, with discs that have more capacity than the HD-DVD format that Toshiba is backing. With no machines on the market yet, it is unclear which format will become the standard.
Recent talks between Toshiba and Sony aimed at unifying the technologies reached an impasse.
The agreement was announced yesterday by Bill Gates, the chairman of Microsoft, and Atsutoshi Nishida, the chief executive of Toshiba. It is an expansion of a pact signed in April, when the two companies agreed to cross-license patents on software and digital consumer electronics.
The alliance is the first of its kind between Microsoft and a major Japanese electronics maker.
"We are very pleased to have this agreement with Toshiba, and I think others may see that as a model," Gates said.
Through their broad alliance, Microsoft and Toshiba hope to make video players and other consumer electronics devices that have a friendlier interface and are easily compatible with home computers.
The companies hope to come up with a DVD player that would use Microsoft's Windows CE software, a stripped-down version of the Windows operating system that is used for hand-held devices and set-top boxes.